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Information trading by corporate insiders based on accounting accruals: forecasting economic performance

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  • Allan Hodgson
  • Bart Van Praag

Abstract

In this paper, we test whether directors’ (corporate insiders) trading in Australia, based on accounting accruals, provides incremental information in forecasting a firm's economic performance. We determine that directors’ trading on negative accruals in larger firms has greater forecasting content and is associated with 1‐year‐ahead bull market phases. Moreover, arbitrage portfolios set up to mimic insider trading can earn 1‐year‐ahead excess size‐adjusted arbitrage returns of up to 12.2 per cent. Results are consistent with directors hiding their trades in liquid well‐traded firms and in providing incremental information above that supplied by a continuous information regime.

Suggested Citation

  • Allan Hodgson & Bart Van Praag, 2006. "Information trading by corporate insiders based on accounting accruals: forecasting economic performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(5), pages 819-842, December.
    • Handle: RePEc:bla:acctfi:v:46:y:2006:i:5:p:819-842
    DOI: 10.1111/j.1467-629X.2006.00206.x
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    References listed on IDEAS

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    Cited by:

    1. Xiaoyan Chen & Allan Hodgson & Martina K. Linnenluecke, 2018. "Transferring and trading on insider information in the United States and Australia: just a case of happy hour drinks?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 83-95, November.
    2. Hodgson, Allan & Da Lim, Wei & Mi, Lin, 2018. "Insider sales vs. short selling: Negative information trading in Australia," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 72-83.
    3. Katselas, Dean, 2018. "Insider trading in Australia: Contrarianism and future performance," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 112-128.
    4. Igor Goncharov & Allan Hodgson & Suntharee Lhaopadchan & Sonia Sanabria, 2013. "Asymmetric trading by insiders – comparing abnormal returns and earnings prediction in Spain and Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(1), pages 163-184, March.
    5. Chang, Millicent & Watson, Iain, 2015. "Delayed disclosure of insider trades: Incentives for and indicators of future performance?," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 182-197.
    6. Dean Katselas, 2020. "Strategic insider trading around earnings announcements in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3709-3741, December.
    7. Hoang, Lai T. & Hossain, Md Zakir & Tong, Jamie Y. & Yang, Joey W., 2023. "Do insider investment horizons contain information? Evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    8. Millicent Chang & Xiaolin Qian & Jing Yu & Yvonne See, 2017. "Does director trading change the information environment?," Australian Journal of Management, Australian School of Business, vol. 42(2), pages 205-229, May.

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